Spanish Constitutional Court overturns Corporate Income Tax advanced payment regime for large taxpayers

On 1 July 2020 the Spanish Constitutional Court ruled that the advance payment regime established for large taxpayers approved by Royal Decree 2/2016 of 30 September, is unconstitutional and, therefore, null and void, because it violates the limits of the power to legislate through Royal Decree.

Background

Under the corporate income tax legislation, large taxpayers are obliged to make advanced payments in the months of April, October and December of each year in accordance with the Royal Decree 2/2016 of 30 September, which entered into force from October 2016.

The Plenary of the Constitutional Court unanimously upheld the question of unconstitutionality raised by the Contentious-Administrative Chamber of the Spanish National Court on the regulation governing the advanced payments. The judgement first analyses the violation of Article 86.1 of the Spanish Constitution which prohibits Royal Decree to regulate matters affecting certain rights, duties and freedoms of citizens, among which is the "duty to contribute to the support of public expenditure" of Article 31.1 of the Spanish Constitution.

Applying the constitutional doctrine on the limits of the Royal Decree-Laws in the tax field, the judgment reasons that, because of the tax concerned, which is one of the most relevant in the Spanish tax system, and because of the importance of the modification introduced in it, which reaches the main elements of the advance payment, the “duty to contribute” is affected.

Key Features

Royal Decree 2/2016 introduced a series of modifications in the calculation of advanced payments for companies with a turnover of more than 10 million euros. These companies where required to calculate a minimum advance payment amounting to 23% of the positive accounting result recorded in the company’s profit and loss account for the period covering the relevant advance payment, provided that this amount is higher than the amount resulting from applying general rules.

The minimum advanced payment made exempt income (e.g. exempt dividends and capital gains) subject to tax and excluded the possibility of offsetting any tax losses carried forward. As a result, advance payments were generally higher than the amounts determined on final self-assessment, and companies were being forced to request a refund for the excess amount paid (without the accrual of delay interest). This minimum advance payment involved a significant increase in the tax obligations of Spanish holding companies (ETVEs), in particular, as they were forced to pay advance corporate tax on dividends and capital gains received even though they are exempt under the Spanish participation exemption regime.

Key Takeaways

Following this judgement it would be possible to claim delay interest for the amounts that were paid in excess through advanced payments in tax years 2016 (October and December) and 2017 over the period between the self-assessment filing and when the refund was obtained after filing. As the advance payment regime was amended as from January 2018 in Laws 6/2018 and 8/2018, it could be interpreted that this judgement would not apply to advance payments after December 2017.